The Average Milk Profit Margin
What is the average profit margin for milk in the U.S.? That’s a hard question to answer, but we can look generally at the historical difference between the retail price of milk and what manufacturers pay farmers for milk. This gives us the range of the gross margin for milk, although individual companies’ profit will obviously depend on their own processing, distribution and marketing costs.
A recent study by business professors at Penn State and the University of Wisconsin looked at the U.S. milk market from 2000 to 2016. During this time, the average retail cost of a gallon of milk ranged from a low of about $2.70 in early 2004 to a high of about $4.00 in 2008.
Generally speaking, farm-level prices roughly followed the same curve as retail prices, but with some variation. For example, the farm-level low price of just over $1 per gallon matched the retail low in 2004, but a comparable farm-level low price also occurred in 2009.
Similarly, while there was a spike in farm-level prices corresponding to the retail high point in 2008 (with prices hitting about $2), this was surpassed by farm-level prices of about $2.40 in 2014.
Subtracting the farm-level prices from the retail prices yields the gross dairy profit margin. This margin doesn’t have tremendous variation, which is to be expected, as manufacturers can generally pass along higher farm-level prices by raising retail prices.
The lowest gross margin in the study was about $1.30 a gallon in 2002, and the highest was about $2.20 in 2009. However, during the entire 16-year period in the study, the gross margin was almost always between $1.50 and $2, with only brief periods during which it was above or below that range.
Although there is a general correlation between wholesale prices and retail prices, resulting in a fairly flat graph of gross margins, the correlation isn’t perfect. Manufacturers do not always rush to raise (or lower) retail prices in direct response to their wholesale costs. They do raise or lower them, but not always immediately and not always to the same extent as the changes in the prices they’re paying.
What this suggests is that manufacturers are interested in “smoothing” prices over time so as not to create a “price shock” for consumers. Thus, they might not raise the cost of a gallon of milk quickly in response to sharp increases in wholesale prices, but to make up for this, they also might not lower the cost of a gallon of milk quickly in response to sharp decreases in wholesale prices.
The study also found that the amount of “smoothing” that manufacturers engaged in varied according to the type of dairy product, and that smoothing was more likely to occur with staples such as milk than with higher-end products.
It should be noted that there are a few difficulties in gathering these figures. For one thing, the average farm-level price can be difficult to calculate because what most farmers actually receive is something called a “blend price.” This is the result of minimum pricing regulations that affect about 90% of the milk produced and sold in the U.S.
The blend price doesn’t reflect the price actually paid by any particular buyer. Instead, what farmers receive is a weighted average of the price for different types of dairy products for which the milk is used.
Thus, the farm-level price for milk that will be sold as “milk” in supermarkets may be affected by the price paid for milk that will be used to make cheese, butter, yogurt and other types of products.
In addition, buyers sometimes pay a premium over the minimum regulated price, and these premiums can be difficult to track.